Yuandi Wu 19402Hanbo Xing 11864Chan Zheng 18834RiskManagement in Start Ups Nowadays, more and more people choose to build their own business.Especially in Silicon Valley, there are many start ups. Some of them getsuccess, however, most of them failed. Half of them fail after five years.
Inthe research paper: Success and Risk Factors in the Pre-Startup Phase, Marcogive a reason why the failure rate of startups is so high. He says, “Oneimportant reason is the lack of a representative sample: nascent entrepreneursare unregistered, which makes them difficult to sample in comparison to smallbusiness owners. In my research paper, I want to do more study on start ups.The research question is that what is the main reason of the high failure rateof startups and how the risk management apply in startups? The hypothesis is thatrisk management is very important in startups, and it can decrease the risk offailure. First, we need to know the life cycle of startups. According to theresearch paper Startup Companies-Life Cycle and Challenges. There are threestages of startup’s life cycle.
The first one is called bootstrapping stage. Itis including individual effort, family and friends, low investment, and angelinvestor. The second stage is called seed stage, it focused on team work,valuation, average investment, accelerators, incubators, and so on. The laststage is called creation stage. It is including organizational arrangements,corporate finance, high investment, and venture capital.
Most of startups fail because of the challenges. The main challenges ofstartups are financial challenges, human resources, support mechanisms, and environmentalelements. The most important one isfinancial challenges, because in the first three years, startups revenue willbe low, if they don’t have strong financial support, they cannot survival. Usually, the beginning is the hardest part of everything. So, companyshould lower the risk at beginning.
How to analysis risk? According to theresearch paper, Cognitive Biases, Risk Perception, and Venture Formation: Howindividuals Decide to Start Companies, “cognitive biases directlyinfluence risk perception, and risk perception directly influences he decisionto start a venture, then cognitive biases indirectly affect the decisionthrough their effect on risk perception. In other words, risk perceptionmediates the relationship between cognitive biases and the decision the start aventure”. So, the first step is to analysis the risk of build a startupand then decide which risk management method can be used. As a leader in startups, you need to know the uncertainties you arefacing. According to the research paper, Managing Complexity and UnforeseeableUncertainty in Startup Companies: An Empirical Study, “The challenge that managersof novel projects must deal with is not only Knightian uncertainty, or the lackof knowledge about probabilities, but even unforeseeable uncertainty, or theinability to recognize and articulate some of the relevant variables themselvesand their functional relationships”. There is a key concept in startups-innovation. Innovation can led moreinvestment, so there should be more revenue because of high risk and highreturn.
According to the research paper, Investment cycles and startupinnovation, ” We find that firms that are funded in hot times are morelikely to fail but simultaneously create more value if they succeed. thispattern could arise if more risky and novel firms are funded in hottimes”. In conclusion, if a person want to build a start up, he need to so therisk analysis first. Then use risk management method to lower the risk. Thereare the best ways to avoid failure. Reference:Macro Van Gederen.
2005. Success and RiskFactors in the Pre-Startup PhaseAidin Salamzadeh. Startup Companies-LifeCycle and ChallengesMark Simon. Cognitive Biases, RiskPerception, and Venture Formation: How individuals Decide to Start CompaniesSvenja C. Sommer. 2009. Managing Complexityand Unforeseeable Uncertainty in Startup Companies: An Empirical StudyRamana Nanda.
July 6, 2013. Investment cyclesand startup innovation